The Long and Short
Diversify P&C risk with Assured Guaranty
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Credit investors increasingly have an eye on potential catastrophe losses for property and casualty insurance underwriters and reinsurers. While not completely insulated from these risks, Assured Guaranty (AGO: Baa1/A) has a much different risk profile than most issuers in the P&C subgroup, offering a way to maintain index composition while diversifying away some of the most extreme cat risk. AGO’s reinsurance operations make up only a small part of their operations, with the public finance market accounting for the bulk of earnings. Payouts on guarantees are only triggered by actual defaults, not ratings downgrades or temporary weakness, so even an extreme environment for P&C underwriters and reinsurers would not necessarily result in materially heightened payouts for the company.
The primary debt issuing entity, Assured Guaranty US Holdings intermediate holding company, is fully and unconditionally guaranteed by the ultimate parent company Assured Guaranty Ltd (AGO).
AGO was in the news recently, announcing plans to merge its two US financial guaranty insurers, Assured Guaranty Municipal and Assured Guaranty Inc. The news provided a pop to the issuer’s share price, as the company will also institute a one-time $300 million stock redemption as a special disbursement to shareholders. The news has limited impact to bondholders but likely could be viewed as a modest credit positive, as the consolidated investment portfolio and cash will be approximately $9 billion and total claims paying resources would be $10.5 billion (as of 1Q24) for the previously separated operating subs. Earlier this year, S&P affirmed the ‘A’ senior debt rating as well as the ‘AA’ insurance financial strength ratings at the operating companies, which are likely to remain intact following the merger.
For index purposes, AGO is classified as a Property & Casualty index exposure but with a significantly different overall risk profile from the traditional ‘A/BBB-‘ rated P&C underwriters in their peer group. AGO boasts competitive strength as one of the few remaining operators in their sector. Despite its troubled past, new issue public finance, which makes up the vast majority of AGO’s portfolio, presents a very stable and captive core business for AGO. The company appears well capitalized for its ratings, with a well-funded portfolio. Bonds trade in similar context to high-‘BBB’ reinsurers with much less predictable cat losses over time (Exhibit 1).
Exhibit 1: AGO bonds trade wide to sector and ratings
Note: Data shows AGO and P&C peers rated ‘BBB+’ and higher.
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications
In recent years, AGO has been terming out its upcoming maturities opportunistically to help improve the company’s overall liquidity profile. After resolving a 2024 maturity, AGO has no public debt maturities until the new 2028 maturity, followed by 2031 ($500 million). As of 1Q24, AGO parent has $115 million in cash and equivalents on the balance sheet but has previously reported over $500 million available at the intermediate holding company.
As it relates to the Puerto Rican debt crisis, it appears most the uncertainty is now contained and that AGO’s remaining exposure is very manageable. A Restructuring Support Agreement (RSA) was struck with the Puerto Rico Electric Power Authority (PREPA) in 2019, which mitigated a lot of the original risk. Risks were then further mitigated in 2022 with the resolution of both general obligations (GO) and GO-backed obligations. As of 1Q24, AGO reported just $109 million of remaining non-defaulting Puerto Rico exposures related primarily to the Municipal Finance Agency. Total gross par outstanding is down to just $1.1 billion.
Potential mergers with part, or all, of either MBIA Inc (MBI: Ba3/NR) and/or Ambac Financial (AMBC: NR) have been an ongoing credit concern with the further resolutions of Puerto Rican debt exposure throughout the industry. However, MBI announced last year that they were taking a pause from actively pursuing strategic options, including a sale, which has cooled some of that speculation. While a deal with either entity would likely result in some form of debt issuance/cash funding, potential total credit impact appears that it would be manageable. MBI has a market cap of just $233 million and a total enterprise value of less than $3.5 billion. AMBC has a market cap of $578 million with an enterprise value of under $1.2 billion.
While AGO’s commitment to shareholder remuneration (as demonstrated by the special dividend) somewhat limits upside to the credit, management has struck a balance between compensating shareholders and maintaining solid credit metrics. Since 2013, AGO has repurchased over 70% of shares for approximately $4.7 billion. The company bought back $129 million in the first quarter of 2024 after just $199 million all last year. The company is scheduled to report second-quarter results on August 7.
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